Housing Bubbles in History
We need to study historical housing bubbles because the real estate bubble is the biggest economic story in America today.
For example, Southern California newspapers now run a Bubble Watch feature. The feature exists because the real estate bubble is the economic story in the Southland. Some of the Bubble Watch features are frightening.
The Orange County Register estimates investors comprised 51% of Southern California home buyers in December 2021. To explain, a high-level of real-estate investors shows speculation is driving the real estate market.
Such speculation is dangerous because investors will pay a far higher price for homes than ordinary people. For example, The Orange County Register estimates the median price Southern California investors paid for a home in December 2021 was $898,000.
How Housing Bubbles Hurt ordinary people
Frighteningly, the level of investment in Orange County housing grew by 32% between summer 2020 and December 2021. Speculative investment in some areas is higher. The number of investor home purchases in San Bernardino and Riverside counties grew by 49% between summer 2020 and December 2021.
Ordinary people who need housing are always the losers in a housing bubble. The Los Angeles Daily News estimates Los Angeles County house payments grew by 12% between 2020 and 2021. The Median home price in LA county was $768,458 on 13 April 2022, up 16% from 2020. Hence, ordinary people cannot afford a home in LA.
Hence, Southern California and America are in a real estate bubble. To see how the Southern California bubble ends, we need to study past housing bubbles. Frighteningly, there have been many real estate bubbles in history and they have all ended badly.
Some noteworthy historical real estate bubble include:
The Great Los Angeles Real Estate Bubble 1886-1887
Strangely, Los Angeles was a little-known backwater until the 1880s. All that changed in 1886 when developers and speculators began hyping the Santa Fe Railway’s planned arrival in LA in 1887.
Completion of the Santa Fe would create a direct rail connection between Los Angeles and Chicago. That meant sunny Los Angeles was now a few days’ train ride from the snowy Midwest. The developers’ hope was that tens of thousands of Midwesterners would realize all they all they needed to migrate to Southern California was a train ticket.
Predictably, a massive real-estate boom followed the Santa Fe’s arrival in Los Angeles. Prices began to skyrocket and developers laid out new towns to cash in on the expected flood of new migrants. Speculators began buying lots hoping to flip them.
“Two hundred and eighty thousand dollars’ worth of lots were sold the first day,” LA Historian J.M. Guinn said of the day Azuza’s developers began selling lots in 1887. “Not one in a hundred of the purchasers had seen the townsite, and not one in a thousand expected to occupy the land.”
When the boom began, an acre of land in the new town of Gladstone cost $500, KCET reports. In a few months, the same acre was selling for $5,000.
In 1887, investors bought $200 million worth of real estate and laid out 400,000 house lots in Los Angeles County. Los Angeles County was soon full of paper towns. Phantom communities such as Garvanza, Alosta, and Gladstone popped in and out of existence.
In some paper towns, developers graded street car lines with no tracks. They also put in water lines and electric lights a new technology. Many of the water pipes rusted in the ground while creditors repossessed the electric equipment.
The boom collapsed as buyers realized the flood of Midwest migrants was far smaller than what the developers had predicted. The paper towns remained on paper and became local legend.
The Great Los Angeles Bubble ended as fast as it had started. The Santa Fe arrived, but the hordes of Midwestern home buyers did not. Consequently, the paper towns went unbuilt and prices collapsed.
By June 1888, the Gladstone Improvement Company had sold two lots. By September 1888, workers removed all the water pipes and powerlines and Gladstone like many paper towns, was history.
Southern California’s history of real estate bubbles was far from over. In the early 1900s, the arrival of a third transcontinental railroad in Los Angeles, the Union Pacific, and the building of the Pacific Electric transit system sparked a second greater boom. During the second boom, they built several of the paper towns, including Burbank and Glendale.
LA would see more booms in the 1920s, after World War II, and in the early 21st century. Today, Southern California is experiencing another housing bubble. Hence, Southern California is a land of real estate bubbles.
The obvious lesson from the Los Angeles Bubble is that reality will catch up with all booms at some point. The LA Bubble burst because the real estate market did not live up to promoters’ expectations. When the Santa Fe trains started rolling into LA, they didn’t bring the hordes of buyers the developers expected. The bust was inevitable.
The Great Florida Land Boom
Southern California is not the only American region shaped by real estate bubbles. Another Sunbelt region, Florida was the site of America’s most famous real estate bubble, the Great Florida Land Boom of the 1920s.
Eastern Florida was a sparsely populated wilderness, until oil tycoon Henry Flagler built the Florida East Coast Railroad in the 1890s. Flagler’s railroad ran all the way to Key West and offered a direct connection between Florida’s beaches and Northeastern and Midwestern cities. Consequently, thousands of people began spending their winters in the Sunshine state.
Southern Florida’s population exploded as soon as the rails arrived. Flagler began developing Miami in 1896. In 1897, Miami was a small town of 2,000 people by the 1920s – it was a city.
In the early 1920s, lower taxes and post-World War I prosperity gave many Americans disposable income. Many of them began buying land in Florida where real estate prices were exploding. A vast real estate industry arose to sell all the property.
The press hyped up the boom with get rich quick stories. A popular one recounted by Florida History is about an elderly man who bought some property in Pinellas County with his $1,700 life savings. The man’s relatives were so horrified by the deal they him committed to an asylum. In a few years, the land’s value grew to $300,000.
They sold two-thirds of Florida real estate, sight unseen to out-of-state speculators. In Florida, so-called “Binder Boys” stood by vacant lots with binders or sales forms. The Binder Boys gave would-be buyers receipts in exchange for an agreement to buy or a down payment.
Demand for Florida land was so high, realtors held up to 10 land auctions a day in Miami at the height of the boom. Buying and selling of property became the primary economic activity in South Florida.
Developers built whole new cities to exploit the boom, including Miami Beach, Boca Raton, Hollywood, and Coral Gables. Southeastern Florida went from a swampy backwater to a major urban area in less than three decades.
I think the Florida Land Boom is the historical real estate most applicable to the present American situation. To explain, a supply chain crisis and two hurricanes burst the Florida Land Boom.
The supply chain crisis began in October 1925 when Florida’s “Big Three” Railroads stopped hauling building materials to the state. Railway executives took the drastic action because there was not enough room for necessities; such as food and fuel, on freight trains. Additionally, executives feared some building materials suppliers were not paying shipping bills.
The railway managers’ drastic action worked. The frenzied land sales in Miami ended. Authorities, including the Florida Real Estate Commission, began cracking down on the worst sellers.
Today, the world is experiencing a Supply Chain Crisis that could get far worse. For example, hundreds of container ships are stuck off ports such as Shanghai and Los Angeles. A supply chain crisis could burst the current US real estate bubble by making it impossible to build new homes. That’s what happened in Florida in 1925.
However, the true end of the Florida Land Boom was two giant hurricanes. First, the Great Miami Hurricane of 1926 caused $269.06 billion in damages when adjusted for inflation. The hurricane’s storm surge covered much of South Florida and destroyed hundreds of buildings.
The Great Miami Hurricane killed around 372 people in Florida. The Red Cross estimates 114 people died in Miami. News about the Great Hurricane burst the bubble by convincing millions of people Florida was unsafe.
The 1928 Okeechobee Hurricane was even worse. Historians estimate the 1928 hurricane killed 2,500 people in the United States. Most of the deaths were in Florida. A 20-foot high storm surge destroyed over 1,711 homes around Palm Beach, the epicenter of the Florida Land Bubble.
The second hurricane killed what remained of the Florida Land Bubble. Florida’s economy did not recover until the 1950s.
I think Climate Change could burst the Great American Real Estate Bubble. The United Nations estimates global temperatures will soon pass a key danger point without drastic action, the Associated Press reports.
“Yet temperatures have already increased by over 1.1C (2F) since pre-industrial times, resulting in measurable increases in disasters such flash floods, extreme heat, more intense hurricanes and longer-burning wildfires, putting human lives in danger and costing governments hundreds of billions of dollars to confront,” the AP observes.
Hence, we will see more natural disasters that could burst our real estate bubble. An obvious example of such a climate disaster is a series of giant hurricanes hitting Florida, repeating the 1920s catastrophe. Climate disasters caused $145 billion in damage and killed 688 people in the United States in 2021, The National Oceanic and Atmospheric Administration estimates.
An equally devastating catastrophe could be a horrendous heat wave that kills hundreds of people in Arizona and Nevada. Just imagine the chaos if thousands or tens of thousands of people flee Phoenix or Las Vegas because of a heatwave.
A greater catastrophe could be a mega wildfire that destroys most of a city such as Los Angeles or Colorado Springs. For example, the Marshall Fire destroyed over 1,000 homes in Boulder County, Colorado, in December 2021.
The Florida Land Boom shows how Climate Change could bring the Great American Housing Bubble to a screeching halt. All it will take is a few months of climate disasters to convert a real estate bubble into a depressed market.
Notably, the Florida Land Bubble preceded the Great Depression by a few years. The Depression began with the 1929 Stock Market Crash, just three years after the Great Miami Hurricane Burst the Florida Land Boom.
The Australian Property Bubble
The Australian Property Bubble is unusual because it is over a decade old. Yet the bubble’s effect on Australian society has been dramatic.
Home prices in Sydney have risen by 105% since 2009. Similarly, house prices in Melbourne have grown by 93.5% since 2009.
Many Australians fear the rising cost of housing and property values are destroying their nation’s traditional equality. Historically, Australians have tried to maintain a classless society.
Traditionally, the Australian economy cooperated with the egalitarian ethic. For example, Australian property prices grew at a rate of 0.5% a year between 1890 and 1990.
Since 1990, property prices have risen for several reasons, Australia’s Productivity Commission observes. Those reasons include rising tourism, which provides an incentive to convert homes into short-term rentals.
Another factor driving up housing prices is large numbers of affluent immigrants who can afford to buy houses. Changes in credit rules in the mid-1990s made it easier for immigrants to get Australian mortgages.
Another factor driving up housing prices is large numbers of affluent immigrants who can afford to buy houses. Changes in credit rules in the mid-1990s made it easier for immigrants to get Australian mortgages.
Observers have been predicting an Australian Housing crash for some time. For example, the Organization for Economic Cooperation and Development (OCED) predicted Australia’s Housing Boom boom could end in a “dramatic and destabilizing hard landing” in June 2016.
Yet, the Australian Property Bubble is growing six years later. The Financial Times estimates the average home price in Australian has grown by 192% since 2008. Not even COVID-19 could slow the property bubble.
Economists are predicting an 8% fall in house prices over the next year, The Financial Times reports. However, Australian home prices grew by 22% in 2021.
One result of the boom has been panic buying of what Australians call bastard properties in fears of missing out on the boom or home ownership, The Financial Times notes. Lack of affordability is driving such panic buying. For instance, the Demographia International Housing Affordability survey lists Sydney as the world’s second least affordable city to buy a home.
So what keeps the Great Australian Property Bubble bubbling despite the experts’ claims? First, Australia is a desirable place to live. It has democracy, equality, a high-level of freedom, a decent welfare state, beautiful beaches, and a great climate. To Chinese and other Asian immigrants, Australia looks like paradise.
Second, the Reserve Bank of Australia has been keeping interest rates low for a long time. For example, the Reserve Bank kept interest rates at 0.1% on 5 April 2022. The interest rate has been at 0.1% since November 2020. Low interest rates make mortgage credit cheap and make it easy for people to get big mortgages.
Australia shows housing bubbles can last longer than the experts think. However, history shows all housing bubbles will crash.
The greatest threat to Australia’s Property Bubble is climate change catastrophes. For example, catastrophic floods could force Australians to abandon some communities, The Financial Times speculates.
A freak storm the press describes as a rain bomb caused the Wilson River to rise by 14.4 meters on 28 February 2022 and devastate the town of Lismore. Obviously, such catastrophes could destroy property values in places such as Lismore overnight, ending the Australian property bubble.
Fire is another threat. Record-breaking temperatures and months of severe drought fueled bushfires that burned over 27.2 million acres and killed 33 people in 2019 and 2020. Fires destroyed over 2,000 homes in New South Wales in the 2019-2020 Australian Winter, the BBC estimates.
Australia’s property bubble could end like the Florida Land Boom as natural disasters destroy the region’s desirability. History shows all housing bubbles end badly. Hence, both Australia and America will experience real estate crashes.